Comments from “Plugged-In” Readers

What no one seems to be catching is the mix in inventory that is coming online. In recent weeks it has been running 2:1 homes purchased before 2004.
Before this, as I recall, it was running about 1:1. This left the equilibrium point of the number of sellers who could afford to sell at the market price vs the number of buyers who could afford to buy at the market price in the 2003-2004 range, with outliers here and there.
Although we are seeing more willingness to bring a quarter million dollar check to the closing than before, for most people, if they couldn’t sell for the mortgage balance, they just rented “until the market comes back”. That was even easier for the long time residents who had low property tax basis and low payments. They could rent their homes at a profit.
Now it’s clear that the market isn’t coming back and more long time residents are having trouble finding jobs after a layoff. If you are over 50 and laid off, you’re essentially retired and so they can’t rent out their home at a small profit, they need the equity in the home to live on.
So they are selling and that will shift the equilibrium point backwards in time so that the number of buyers meets the number of sellers who have owned before the current 2003/2004 timeframe, because the long time owners can undercut the prices of the more recent owners. The more of them there are, the lower prices can go, and there are more of them.
Adding to this effect is the fact that the strategic defaulters, those who stopped paying their mortgages in late 2008 when it because clear their homes were firmly underwater, are still in those homes, but they are now starting to come onto the market via foreclosure. So that adds to inventory and further depresses prices.
Then couple that to the fact that mortgages are harder to get, more expensive to get, and a lot of people don’t have much job confidence, and that makes most buyers, if not scarce, realize that they have the upper hand (with the occasional outliers), because if it’s not happening to you, it’s happening to a lot of your neighbors, so you know there isn’t much competition and if there is, there will be a cheaper house next month.
So it’s not just the months of supply, it’s the pain threshold of the supply. People who bought at the peak seem to have a max threshold of about $250K. Beyond that, they’ll take it off the market and so that affected supply and kept the market loftier. In years past, the pain threshold was much higher than I’ve been seeing in the last few weeks.
There is, of course, no pain threshold at all for the banks. They will sell for whatever the market will bear. They aren’t dumping homes, but they aren’t going to pull them off the market if an arbitrary price point cannot be reached. That is a big difference from what the prior owner might have done and so that allows prices to move lower.
All that means the price point can now move lower without supply going below demand. So it’s more than just months of supply going up: the pain threshold has to move lower too, and it is.

On tipster’s point re the banks just dropping the price til it sells with no emotional waiting “until the market comes back,” this may be a new record bubble->current % price drop for SF:http://www.redfin.com/CA/San-Francisco/248-Ridge-Ln-94112/home/824519
Down 61% from 2005 if sold at asking – short sale. Not that different from Antioch or Brentwood. Don’t know if it is an “apple” (either improved or deteriorated from 2005) but the pics certainly show it to be “lived in.”

From the ever useful CR:
“IMPORTANT: On a seasonal basis, inventory usually bottoms in December and January, and then will start increasing again in February and March. Since the NAR “months-of-supply” metric uses Seasonally Adjusted (SA) sales, but Not Seasonally Adjusted (NSA) inventory, this seasonal decline in inventory leads to a lower “months-of-supply” in December and January. ”http://www.calculatedriskblog.com/2011/01/existing-home-inventory-increases-84.html
In general, seasonal adjustment is a good idea so you have some context in which to put month over month data. i.e. If you were to annualize the MoM change in home sales from Oct-Dec you could falsely convince yourself of a home sales apocalypse.
However, during period of turmoil, since seasonal adjustment looks at past years to create the adjustment factor, the SA process can basically add noise to the data. So it’s worth looking at both the SA and Non-SA data.
As indicated above though, this particular “months of supply” metric takes a ratio of Non-SA data over SA data. Which seems guaranteed to distort the data. i.e. If both actual inventory and actual sales are flat during a time period which has a non-zero adjustment factor, the ratio will show a change even when there is none in the underlying data.